Originally published on Forbes.com Apr 20th, 2013
Helping the authorities root out wrong-doing might be seen as a public spirited activity. When that principle is applied to tax compliance, though, it does not resonate with me emotionally. I think it is wrong for people in cash businesses to not report all their receipts. On the other hand, I could never envision myself reporting somebody for it.
Not everybody shares my aversion to being a free-lance amateur tax enforcer. It turns out that there is enough interest in the activity to require the IRS to have a form for it. Several different forms actually, but the primary generic form to be used by concerned citizens to report suspicions of “Violation of Income Tax Law” is Form 3949 A – Information Referral. I just learned about this form, because of a report by TIGTA (Treasury Inspector General for Tax Administration).
According to TIGTA, IRS has not been doing a stellar job of handling these forms. There seem to be problems with the screening process:
Improvements to the process and better communication with the Account Management function will reduce the number of referrals the divisions receive, allowing both the SB/SE and W&I Divisions to process Forms 3949-A more efficiently and effectively. TIGTA determined both SB/SE and W&I Division screeners improperly screened referrals. Neither division has a routine review process to evaluate screened referrals not selected for examination. Furthermore, the SB/SE does not have specific guidelines or instructions for screeners to use when screening referrals. Improving the process may allow the divisions to select more referrals with examination potential.
During fiscal years 2010 through 2012, the IRS assessed more than 66.5 million dollars thank to concerned citizens (or rodents of uncertain parentage if you have a different point of view) who submitted 274,976 Forms 3949-A. I have to say that when you do the math, it is not all that impressive. It works out to less than $250 per report. That would account for TIGTA hoping to improve the screening process.
“The IRS must ensure that it makes effective use of information from those individuals who report suspected tax fraud,” said J. Russell George, Treasury Inspector General for Tax Administration. “This is a critical component of the IRS’s enforcement efforts,”
Form 3949-A Is Not The Only Form
If you are feeling public spirited or vindictive, you will want to check out this webpage to make sure you use the right form to provide your information. Form 3949-A covers most situations, but if, for example, you want to report a tax preparer who you think altered your own tax return you will need Form 14157 . If a phony charity has you upset, use Form 13909. If you think that you are entitled to get a piece of the action you need Form 211.
There has to be at least two million bucks involved for you to qualify for a reward, so don’t go using Form 211 for penny-ante stuff. It is actually quite hard for whistleblowers to shake reward money lose from the IRS, so you might be better served to bring your information to a law firm that specializes in that sort of thing, like the Young Law Group, which helped someone collect a 4.5 million dollar reward in 2011.
A Caution To The Non-compliant
In my mind, the most salutary aspect of these programs is the effect they might have on the non-compliant. The programs will probably not discourage many people from skimming cash receipts or making up phony deductions, but, if they are not stupid, they should realize that it is a very bad idea to brag about such activities. You may think that the IRS will never see through your brilliant deception, but that will be of no help if your disgruntled ex-employee, ex-spouse or ex-covivant knows all the details and is motivated by public spiritedness or spiteful malevolence to rat you out.
You can follow me on twitter @peterreillycpa.